An industry once plagued by insufficient capacity now sees ships stuck idle at port.
Shipping is in crisis.
The Baltic Dry Index which measures shipping costs in commodities sunk to its seventh weekly decline this week to 829 points, and is down more than 93 percent since hitting a record peak in May.
But it’s more than just a response to a global slowdown - capacity constraints during the commodities boom combined with low financing costs led to a massive wave of new investments into fleets. Lloyd’s List estimates containership fleet capacity is set to expand by more than 50 per cent over the next four years. The timing couldn’t be worse.
Reuters reports up to a third of dry bulk ship orders could now be axed, while Bloomberg reports 20 per cent of vessels usually transporting coal and ore are sitting empty:
Fifty to 100 so-called capesizes, each bigger than The Trump Building in New York, have been unable to find cargoes or their owners won’t accept rental rates that have plunged 98 percent in five months, Sjuve said by phone today. Normally about 250 such carriers compete for spot bookings, he said.
Traders and brokers saying there are simply no cargoes, steelmakers like ArcelorMittal warning on output, concerns over letters of credit. Could it get any worse?
Bank of America’s John Rothfield says probably not.
A comparison of the Baltic Dry and the CRB commodities index presents the case freight rates may have found a floor - the Baltic being a fair proxy for global shipping activity as it tracks raw materials from global raw suppliers to Asia and container ships of consumer goods back to the US and Europe,
Rothfield compares the current numbers to the lows of 1999, when the index reached a low of 776, and the aftermath of the Asian crisis, when it reached 843.
Conclusion?
Given that both a U.S. recession and Asian slowdown are back in play, a drop in shipping freight rates to comparable levels was always possible. When converted to actual freight rates, prices on many routes had moved to slightly below the actual cost of maintaining ships on the ocean, so that shipping companies had incentives to withdraw ships, putting a floor under freight rates. In this context, Figure 19 shows that whereas shipping freight rates have slumped to 2001 levels, the CRB index, a key measure of commodity prices, has not fallen as far.
So while shipping rates may have found a floor, the fact they’ve declined more quickly than the CRB suggests the commodities index could have further slides in store. That, or we could see a revival of shipping rates in the next few months, says Rothfield.
As for who’s been caught out on this month’s plunging prices - the final outcome of today’s settlement in Forward Freight Agreements (FFAs) for October will most likely be known Monday reports Lloyd’s List.
Defaults are a distinct possibility, as many had bet the market would rebound on a China-led recovery post the Olympics.
Related Links:
Who’s in the wake for shipping losses - FT Alphaville
Wave of losses loom for shipping industry - FT.com
